U.S. Stocks, Treasuries Drop With Euro as Oil Retreats

By Claudia Carpenter and Callie Bost -
Aug 12, 2014

U.S. stocks fell with the euro as German confidence declined more than economists forecast and concern grew over conflicts in Ukraine and the Middle East. Treasuries slid and oil paced losses in commodities.

The Standard & Poor’s 500 Index declined 0.2 percent at 4 p.m. in New York, after the biggest two-day gain since April. The yield on 10-year Treasuries rose 2 basis points to 2.45 percent, as an auction of three-year notes drew the lowest yield since April. The euro dropped against 14 of its 16 major rivals. The S&P GSCI Spot Index of commodities tumbled 1 percent as Brent fell to the lowest in 13 months and soybeans slid on a crop report. Emerging-market stocks advanced for a second day.

German investor confidence reported by the ZEW Center dropped to the lowest level since 2012 as the crisis in Ukraine and a sluggish euro-area recovery damped the outlook for Europe’s largest economy. A Russian humanitarian mission was headed toward eastern Ukraine after the U.S. warned President Vladimir Putin not to use aid as a cover to send in troops.

“We’re in a zone of ambivalence with investors maintaining a cautious bias,” Terry Sandven, chief equity strategist at Minneapolis-based U.S. Bank Wealth Management, which oversees $124 billion, said by phone. “Equities appear to be navigating the dog days of summer with markets being driven more by geopolitical events than economic and company fundamentals.”

Geopolitical Crises

The S&P 500 rose 1.4 percent in the past two trading days, the benchmark’s first back-to-back gain in two weeks, on speculation that tension between Russia and Ukraine will ease and American airstrikes will push back militants in Iraq. The benchmark index had fallen 3.9 percent from its record of 1,987.98 on July 24 on concern that global conflicts could slow economic growth.

Equities slumped today amid signs of continued tensions. Ukraine won’t let a convoy of 280 trucks that Russia says are carrying humanitarian aid enter the country in its current form because it argues the mission doesn’t adhere to international rules.

“We are not considering any movement of Russian columns through Ukrainian territory,” Valery Chaly, the deputy head of Ukrainian President Petro Poroshenko’s administration, said in Kiev. Only trucks owned or rented by the Red Cross will be allowed, and Ukraine will consider an attempt by any military convoy or operation to cross the border “as an act of aggression,” Chaly said.

Middle East

In the Middle East, wide gaps remain between Israel and the Palestinians in reaching a long-term deal on the Gaza Strip, an Israeli official said, as Hamas warned there would be no more truces beyond the one due to end at midnight tomorrow. Iraq’s Prime Minister Nouri al-Maliki chaired a meeting of military officers in the latest sign that he won’t hand power to designated successor Haidar al-Abadi.

The Stoxx Europe 600 Index slid 0.2 percent after its biggest rally since April yesterday. Henkel AG lost 5.3 percent after warning that earnings growth will slow amid the conflicts in Ukraine and the Middle East.

The euro fell against 14 of its 16 major peers. The dollar appreciated 0.1 percent to $1.3367 per euro and was little changed at 102.23 yen.

The ZEW index of investor and analyst expectations in Germany, which aims to predict economic developments six months in advance, dropped to 8.6 in August from 27.1 in July. The gauge has slipped every month since reaching a seven-year high in December.

Growth Engine

“The poor ZEW data is bad news for the euro,” said Peter Rosenstreich, chief foreign-exchange analyst at Swissquote Bank SA in Gland, Switzerland. “We know about the economic weakness in peripheral countries like Italy, but there’s always hope that Germany will be a growth engine that supports the region. Now the growth engine itself seems to be sputtering.”

European Central Bank President Mario Draghi said last week that “heightened” political risks could affect the region’s recovery. The ECB announced an unprecedented package of stimulus measures in June that will take time to work through to the real economy.

Treasury Auction

Treasuries declined after the U.S. auction of $27 billion of three-year notes drew the lowest yield since April. The debt yielded 0.924 percent, compared with a forecast of 0.925 percent in a Bloomberg News survey of six of the Federal Reserve’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.03, versus an average of 3.35 for the past 10 sales.

Bill Gross cut holdings of Treasuries and related debt in the world’s biggest bond fund in July, a report showed yesterday, amid speculation the Federal Reserve will raise interest rates next year as the economy improves.

Gross cut U.S. government-related debt in his $223 billion Total Return Fund at Pacific Investment Management Co. to 45 percent of assets last month from 47 percent in June, according to data on the company’s website. He increased non-U.S. developed debt to 17 percent, the most since December 2011, from 16 percent, the data showed.

A government report today showed job openings rose in June to the highest level in more than 13 years, firming up the U.S. labor market picture for the second half of the year. The figures are among those on Fed Chair Janet Yellen’s labor-market “dashboard,” which she uses to help guide monetary policy.

Economic Growth

Recent reports have shown U.S. gross domestic product expanded at a 4 percent annual pace in the second quarter, confirming the Fed’s view that a first-quarter contraction was transitory. Data on July retail sales is scheduled to be released tomorrow.

The MSCI Emerging Markets Index increased 0.3 percent, giving it the biggest two-day gain since March after yesterday’s 1.5 percent rally. Tata Motors Ltd. surged the most since September after net income grew threefold, helping to send Indian equities to the steepest increase in two months.

The MSCI Asia Pacific Index added 0.5 percent after surging 1.2 percent yesterday, the most since June 19. The measure lost 2.4 percent last week on concern about the conflicts in Ukraine and the Middle East.

Brent crude lost 1.6 percent to the lowest since July 2013 as the International Energy Agency said a supply glut was shielding the market against threats in the Middle East. The IEA cut projections for oil demand growth this year and next and estimated that output from the Organization of Petroleum Exporting Countries rose to a five-month high. West Texas Intermediate crude slid 0.8 percent.

Soybeans fell 1.3 percent after a government report showed supplies will be bigger than forecast in the U.S., the world’s top grower. U.S. farmers will harvest a record 3.816 billion bushels this year, compared with 3.8 billion (103.4 million metric tons) estimated in July, the Department of Agriculture said today in a report after completing its first surveys of farmers and fields.